• Overview. 2Q19 net profit plunged 80% yoy mainly on weaker product spread amidst excess supply from US. This brings 1H19 profits down 83% yoy to RM77m. On qoq basis, net profit rose 32% qoq to RM43.7m due to higher other income.

• Key highlights. 2Q19 plant utilisation was higher at 89% (2Q18: 82%, 1Q19: 87%). Due to commercial operation of new PP3 plant in 4Q18, 1H19 production volume rose 13% to 1,551k MT (1H18: 1,376k MT) while sales volume rose 10% to 1,035k MT (1H18: 939k MT).

• Against estimates: below. 1H19 net profit were both below ours and consensus forecast at 14%.

• Outlook. Average product spread remain subdued with no tangible recovery. Nonetheless, we expect a stronger 2H19 on higher contribution from associate US shale gas plant which is expected to commence commercial operation in 3Q19.

• Expansion update. The company is reviewing project and funding structure for the Lotte Indonesia New Ethylene (LINE) project. It may rope in other party, possibly parent Lotte Corporation given the weak market condition. The final plan will be announced by end of 3Q19.

• Our call. We upgrade to HOLD (from SELL) with an unchanged RM2.90 TP after its share price fell 32% YTD. Our TP is based on the GGM methodology and implies a fair EV/ROIC multiple of 0.3x (Table 2). Its cash balance remains healthy at RM3.3bn (at end 2Q19) with zero debt which positions the company to ride through the rough market condition.

Source: BIMB Securities Research - 1 Aug 2019